SD startup joins crowd-lending rush

Russell McLoughlin, left, and Ethan Senturia, right, co-founders of Dealstruck, a crowd funding marketplace that connects established, growing, small and medium size businesses with individual and institutional investors who want to lend money to those businesses, work on a workflow diagram.
— Howard Lipin

Russell McLoughlin, left, and Ethan Senturia, right, co-founders of Dealstruck, a crowd funding marketplace that connects established, growing, small and medium size businesses with individual and institutional investors who want to lend money to those businesses, work on a workflow diagram.
— Howard Lipin

You may have heard of Kickstarter, the website that crowdsources capital for startup companies.

A new La Jolla company — Dealstruck — wants to take that concept a step further and use the power of the crowd to make business loans.

Dealstruck runs an online site that matches small businesses with lenders. The company does not lend; it simply helps investors and borrowers find each other. Multiple investors can pitch in, and instead of making equity investments, they provide the money for loans.

Co-founder Ethan Senturia, 27, considers his company an “alternative to the alternatives” in a market burgeoning with companies trying to fill a gap in the market. That gap has been created by tighter federal standards on banks as a result of the recent financial crisis.

Unlike Google Ventures, which makes loans to startups, Dealstruck will lend only to established small businesses. Its closest competitors, Kabbage and On Deck Capital, lend their own money, much like a bank.

“At a high level, Dealstruck is a marketplace for growing, established small and medium businesses to access affordable loans from individual and institutional investors,” said Senturia, who graduated from Wharton School of the University of Pennsylvania and worked as an analyst at both Lehman Brothers and Barclays Capital.

It is also an opportunity for investors unhappy with their fixed-income returns on short-term loans to get a better return on their investment, he said. Dealstruck estimates investment returns will run from 5 percent to 15 percent, but warns of the risks inherent in lending to businesses.

“If you cannot afford to lose the entire amount of your investment you should not invest,” the company’s website advises.

Dealstruck is open to only accredited investors — those who meet the qualifications of individual accredited investors under SEC guidelines. It also says it has a more detailed and rigorous credit screening than other alternative lenders, which allows it to offer interest rates of 5 to 15 percent, compared with its competitors’ rates of 15 to 30 percent.

Dealstruck launched with 50 investors who informally committed to lending a combined $1.5 million through the platform. Already the company has received applications from 100 businesses, and investors have funded their first two requests. A $250,000 request got full funding from 21 participants within five days, and 11 investors fulfilled a request for $100,000 within 48 hours.

Since it isn’t earning loan interest, the angel investor-funded Dealstruck earns its money from fees. Businesses that get approved pay an origination fee when their loan is funded, and investors pay a servicing fee on the repayments that are made.

How Dealstruck Works

Borrower

• Apply online. Borrowers with liens, judgments, bankruptcies, and poor financials will not be approved.

Ideally, Senturia and co-founder Russell McLoughlin hope to transform small-business debt into an asset class of its own.

“The beautiful part of what we’re doing is that you can take $100,000 and invest it in 20 or 40 loans, so you don’t have to make one $100,000 loan,” Senturia explained. “That way you get the benefits of diversification.”

The partners came up with the concept last November after observing that some small businesses still have trouble getting mid-sized loans.

“A lot of times, you can’t get a loan even if you are a successful business, and the alternatives are really expensive,” Senturia said. “The rejection rates have not moved significantly from where they were a year ago, and there’s increased regulation making it more expensive to be a bank that caters to that market.”

Dealstruck targets companies that either can’t qualify for a traditional capital loan from a bank, or just want a faster and simpler borrowing process. It serves established businesses generating between $500,000 and $10 million in revenue, and focuses on requests for between $100,000 and $1 million. The capital can be used for expansion expenses like new equipment or small acquisitions, Senturia said, but it cannot be used for real estate.

By contrast, general loans from the Small Business Administration run as high as $5 million, with no minimum amount, and averaged $337,730 in 2012. The SBA also offers real estate and equipment loans of up to $5 million.

Dealstruck isn’t Senturia’s first venture. After he left Wall Street, he started an Internet marketing company, Ampush Media. His father, Neil Senturia, is a serial entrepreneur who with his wife Barbara Bry writes an unpaid column on entrepreneurship for U-T San Diego. Neil is Dealstruck’s executive chairman.

Senturia teamed up with McLoughlin, 26, for his computer science background, which includes stints at tech icons Google and Apple.

Because it does not take deposits, Dealstruck is not subject to the same regulations that banks face in the wake of the Dodd-Frank Act, which aims to cure industrywide irresponsible lending. The business does have to deal with federal investment and state lending laws, though, Senturia said.

Despite stricter standards for banks, Richard Sanborn, president of Seacoast Commerce Bank in Rancho Bernardo, said there is plenty of credit available to small businesses, as long as they are able to provide sufficient proof that they will be able to pay it off. His institution, the eighth most active Small Business Administration lender in the country, approved only half of SBA applicants in 2010, Sanborn said, and now the approval rate is nearing 80 percent.

Sanborn said Dealstruck is essentially a loan broker, but he doesn’t know how easy it will be to find investors willing to take on the risk with businesses that can’t qualify for traditional loans. Because the investors bear the risks, he said, Dealstruck has less incentive than a bank would to collect on borrowers who default on their loans.

Still, Senturia is confident there is a market for his service.

“From our standpoint, we see good demand,” he said. He spoke with bankers around San Diego who had loan applications they said should have gone through, but didn’t because the business didn’t pass, say, one of 20 criteria.

CDC Small Business Finance CEO Kurt Chilcott said in many cases banks will issue a loan to a struggling small business only after it obtains a “credit enhancer” that can help offset the bank’s risk. Examples of such enhancers are Small Business Administration loan programs, and the process for obtaining those can be slow and lengthy.

The result has been a rise in the number of non-bank, or alternative lenders, Chilcott said.

“There’s been this development of a lot of different online lenders, and they tend to be able to get you your money much more quickly than you would be able to get it through a traditional loan or what we do, which are SBA loans,” he explained.

Dealstruck's Competition

Kabbage

Loan Size: $500-$50,000

Term: Six months

Interest Rate: 2 percent to 10 percent

Funding Decision: As little as five minutes

Who Lends: Kabbage lends its own money

OnDeck

Loan Size: $5,000-$150,000

Term: 3 months to 18 months

Interest Rate: 9 percent to 20 percent

Funding Decision: One hour to one business day.

Who Lends: OnDeck lends its own money

Dealstruck

Loan Sizes: $100,000-$1 million

Term: 2 years to 5 years

Interest Rate: 5 percent to 15 percent, plus origination fee

Funding Decision: 48 hours

Who Lends: Accredited investors, with Dealstruck brokering the deals

Dealstruck promises a funding decision within 48 hours, compared with the 30 to 45 days traditional bankers say they average. Banks that administer smaller business loans are capable of 48-hour turnarounds, Sanborn said, but that kind of convenience with an alternative lender can come at a high price to borrowers, some of whom pay as much as 30 percent in interest on such loans.

He says he doesn’t worry about approving loans for businesses that might not meet traditional loan standards, because he believes that by looking at more than a credit score, he is putting a more accurate price tag on the associated risks.

His business model also spreads the risk among multiple parties.

Finally, he said, many businesses that are considered “non-bankable” by today’s legal standards, were perfectly bankable five years ago.

“I think some banks may see us as a threat, but more so they see us as a complement,” Senturia said. “There’s lots of opportunity. Especially as we come out of a cycle that was pretty painful for a lot of businesses, the prospects are going to be brighter and businesses are going to look at expanding.”